J M Smucker Co (SJM) 2005 Q2 法說會逐字稿

Good morning and welcome, ladies and gentlemen, to the J. M. Smucker Company's second-quarter 2005 earnings conference call. As a reminder today's this is being recorded. At this time I would like to inform you at this conference all participants will be in a listen-only mode.

At the request of the Company we will open the conference up for questions and answers after the presentation. I will now turn the conference over to Mr. Mark Belgya. Please go ahead, sir.

Good morning, everyone, and welcome to the J. M. Smucker Company second-quarter 2005 earnings conference call. I'm the company's Vice President and Treasurer, and I thank you for joining us this morning. On the call from the Smucker Company today are Tim Smucker, Chairman and co-CEO; Richard Smucker, President, co-CEO, and our Chief Financial Officer; Vince Byrd, Senior Vice President of our Consumer Market; Fred Duncan, Senior Vice President Special Markets; Steve Oakland, Vice President and General Manager of our Consumer Oils and Baking business; Mark Smucker, Vice President and Managing Director Canada; and Paul Smucker Wagstaff, Vice President and General Manager of our Foodservice Market.

After this brief introduction, I will turn the call over to Tim for opening comments and a recap of the quarter. I will then review the financial results for the quarter, and then Richard will provide closing comments. At the conclusion of these comments we will be able -- available to answer any questions.

If you have not seen our press release it is available on our website at Smuckers.com. If you have any follow-up questions after today's call, please feel free to contact either George Sent (ph), our Director of Corporate Finance and Investor Relations, or me.

I would like to remind you that certain statements in this presentation and during the question-and-answer period that follows may relate to future events and expectations and as such constitute forward-looking statements within the meaning of the Private Securities Legislation Reform Act of 1995. I invite you to read the full disclosure statement concerning such forward-looking statements in our press release.

I also want to point out that the Company uses non-GAAP results for the purpose of evaluating performance internally. Additional discussion on non-GAAP information is also detailed in our press release.

Finally, before I turn the call over to Tim, I want to point out that the results of our Brazilian operations have been added to discontinued operations with our announcement earlier this quarter on the sale of that business. With that I would like to turn the call over to Tim.

Thank you, Mark, and good morning, everyone. Thanks for joining us. Let me summarize the key messages for the quarter.

First, the second quarter marked another period of record financial performance for the Company. Second, the base business performed well with sales growth for the period. Third, the integration of Multifoods continues on track, and the new brands added significantly to the results for the quarter. And finally, we continue to execute on our strategy to own and market leading North American icon brands sold in the center of the store, and have again refined our portfolio to reflect this focus.

This is the first full quarter of Multifoods operations, bringing the Pillsbury, Martha White, Hungry Jack, Robin Hood, and Bick's brands into the Company's family of brands. As we expected, the Multifoods brands have had a positive impact on our financial results.

Last quarter, we talked about our marketing teams coming up to speed with each of the brands and putting the finishing touches on our Fall Bake programs. We are encouraged by these results and by the Pillsbury brand in particular. Not only have the sales for the base business been strong, but also the new products that were recently introduced have continued to grow with positive consumer response.

The results for the Pillsbury brand give us confidence in the opportunities the brand will provide for the future top and bottom-line growth. We will continue to support the brands with additional marketing, much as we did with Jif and Crisco when we acquired them.

We are excited about continuing to develop new products to enhance the growth opportunities.

In regard to Canada, we have focused our efforts in these early months on combining 2 organizations to create a single Company culture. We are in the process of consolidating several office locations into a single Canadian headquarters in Toronto. We are nurturing and developing our new icon brands through increased investment and enhanced brand management focus.

Performance during the quarter met our expectations, and we remain enthusiastic about the opportunities to grow the business. Our employees have been key to the success of the integration and achieving our brand strategies. We thank them for their dedicated efforts during this exciting period of change.

Other key milestones in the Multifoods integration efforts coming over the next few months include an integration of the order to cash process in Canada, similar to that achieved earlier this year in the U.S.; consolidation of our supply chain onto a common system in U.S. and Canada; and the closing of the Minneapolis headquarters by the end of the fiscal year. Integration of the Multifoods business continues on plan.

In looking at our base business, we continue to see sales growth in nearly all of our business units. Smucker's and Jif brands increased during the quarter, and we also had good growth in our beverage and foodservice portion control business.

In the oil category, there continues to be strong competitive activity. We did mention in our last call that the timing of certain promotions had been moved toward later in the Fall Bake period and next Spring.

In addition, we're enthusiastic about our new Crisco packaging with the pour-back measuring cup. This is the first major packaging innovation in the category in several years. Preliminary response from the trade has been very favorable, and we expect a positive response from consumers when the new packaging appears in stores in January.

Let me comment on 2 other key activities that occurred during the second quarter. In October, we completed the sale of our Brazilian operation as part of our continuing focus on refining our portfolio. This business was not in line with our North American branded strategy. We were pleased to sell the business to Cargill, who can continue to provide both the business and employees an opportunity for growth in that market.

Also, during the quarter we announced a voluntary odd-lot program as part of our stock repurchase authorization. To date, we have reduced our shareholder base by approximately 50,000 shareholders or about 10 percent. We recently announced that the program has been extended until December 17.

So in sum, we had a successful quarter. Financial results were strong, the integration is moving ahead quickly, and we are beginning to see positive results in the new brands. I would like now to turn the call back to Mark to have him walk through the financial results for you.

Thank you, Tim. Sales for the quarter were nearly 589 million, up 57 percent compared to last year. The Multifoods business contributed $209 million to sales in the quarter. Excluding this contribution from Multifoods and planned declines from rationalization programs, sales for the quarter increased 3 percent.

On a GAAP basis, income from our continuing operations was up 24 percent. Due to the additional shares issued as part of the Multifoods acquisition, our earnings per share increased by 6 percent.

Excluding restructuring charges and merger and integration costs that we detailed in our earnings release, income from continuing operations increased to 28 percent, with a corresponding increase in earnings per share of 9 percent. Earnings per share was 75 cents this quarter, compared to 69 cents last year.

Our operating income increased 29 percent, while operating margin for the year was 11.6 percent compared to 14.1 percent. As expected, gross margin for the quarter declined from 35.5 percent to 32.1, as the addition of the lower-margin Multifoods business reduced the overall margin. However, over time, with our integration activity and the resulting synergies, we would expect these margins to improve.

An overall increase in restructuring and merger and integration charges during the quarter versus a year ago also contributed to the operating margin decline.

SD&A as a percent of sales declined from 21.1 percent to 19.6 percent. This decrease occurred despite the fact that we increased marketing and selling by 39 percent.

We realized an increase in overall administrative expenses during the quarter primarily due to an increase in employee benefit costs and the cost of operating the Multifoods headquarter office in Minneapolis. This office will close by the end of the fiscal year, and we would expect to see a continuing decline in these costs over the last half of the year as compared to our first 6 months.

Interest expense increased by over 4 million, resulting from the additional debt related to the Multifoods transaction. This expense was less than the estimate previously provided by the Company, and this was attributed the purchase accounting treatment on certain components of the Multifoods debt as is required by GAAP. This lower interest charge will continue into future quarters, but does not have an impact on the actual interest paid to the noteholders.

Now let us take a look at the results for the quarter by our 2 business segments. Sales in our U.S. retail segment were 410 million, up 46 percent compared to last year, with Multifoods contributing 126 million.

In the consumer business area, sales were up 17 percent for the quarter, driven by growth in the Smucker's and Jif brands, the addition of Hungry Jack, and continued growth of Uncrustables.

In the Consumer Oils and Baking area, sales nearly doubled due to the addition of Pillsbury, Martha White, and Pet brands. Sales of new products, primarily the Ultimate Dessert kit and whipped frosting, helped drive performance of the Pillsbury brand. In our oils business, the Crisco sales in the retail channel were down 6 percent compared to last year.

In the special markets segment, sales were 179 million, nearly doubling last year. The addition of Multifoods contributed 83 million to the segment's overall growth. All business areas were up except industrial. The increase in beverage sales and traditional foodservice led this segment's growth.

The segment's performance also included planned sales decreases in both the industrial and international areas. If you exclude these planned declines and the contribution from Multifoods, special markets increased 8 percent in the quarter. I would now like to turn the call over to Richard.

Thank you, Mark, and good morning, everyone. As Tim mentioned, we had another record quarter. Our base Smucker business continued its strong performance, and the Multifoods business has added to that. We appreciate the efforts of all of our employees in integrating these businesses, while maintaining their focus on the continuing improvement of our base business.

I would like to spend a few minutes today updating you on the current status of the Uncrustables and our Scottsville, Kentucky, plant. The most important point is that consumer response to Uncrustables remains strong, and we remain excited about the growth platform the Uncrustables offers to our consumers.

We continue to support Uncrustables in the retail channel with significant marketing spending and have fully supplied our retail customers. Our schools channel is still on allocation. But we have seen some easing of this recently, and we're working to minimize the impact.

Despite the production challenges, we are pleased to report that the sales of Uncrustables were over $30 million in the first 6 months of this year, an increase of more than 17 percent over the comparable period last year.

As we discussed in the first quarter, we have not been able to ramp up the production as quickly as we previously anticipated. Because of the learning curve, we are incurring additional startup costs consisting primarily of incremental labor, materials, and unabsorbed overhead.

However, we are making progress, as evidenced by increasing throughput rates. Compared to the end of the last quarter, we achieved a 30 percent improvement in the number of sandwiches produced per minute. We continue to make improvements and are encouraged by this progress.

We expect to incur approximately $10 million in additional cost during the last 6 months of the year. We are confident in our ability to meet the forecasted demand by the end of this fiscal year. We view this ramp up issue as a short-term concern. In the long run, this facility will provide the production that will allow us to meet the growth and profit objectives that we have for Uncrustables.

Now let me comment on our outlook for 2005. Since our original announcement in June regarding our 2005 outlook, we continue to experience increases in commodity, energy, and employee benefit costs. The startup of Scottsville has also carried a significant earnings impact.

However, despite these many variables, we remain committed to increasing our earnings per share from continuing operations by our stated long-term annualized growth of 8 percent. This equates to a growth rate for 2005 of approximately 24 percent on earnings from continuing operations. An increase of approximately 8 million shares issued as part of the Multifoods acquisitions accounts for the difference in the growth rates.

So we remain committed and confident in our original growth outlook that we gave you that the beginning of the year.

In closing, let me summarize some key points. First, we once again achieved record results for the quarter. Second, our base business remains strong, and the acquired brands performed ahead of our expectations.

Third, the integration of Multifoods is on track, and we remain comfortable with our synergy projections. Fourth, we remain focused on our strategy to grow and improve the performance of our North American icon brands.

Fifth, we continue to aggressively implement our plans for top-line growth and cost reductions to drive bottom-line growth over time. Finally, we remain committed to our 2005 guidance, recognizing that we take a long-term view of running the business and growing brands very productively, resulting in proven returns for our shareholders.

We are on track for another record year of results. Our brands have many opportunities for growth, and we will continue to support them with investment dollars. We thank all of our employees for their ongoing dedicated support as we move forward on the many initiatives that will enhance the performance of our Company in the coming years.

With that, we thank you, and we now are happy to answer any questions you may have.

(OPERATOR INSTRUCTIONS) Prudential Securities, John McMillin.

I have 2 questions. The first is to Tim and his statement in the press release that the performance of our brands was strong and exceeded our expectations for the quarter. Tim, when you look at Nielsen numbers, and I know they are up against some tough comparisons, but you have declines of over 100 basis points on a 12-week basis through October for all 4 major categories, baking mixes, cooking oils, peanut butters, and jams.

I just don't know what your expectations were for the quarter in the retail markets. But they seem a little soft based on this measure that obviously does not include Wal-Mart but does represent a good percentage of your client base.

John, thanks for the question, because actually we're very enthusiastic about the growth. As you know we look at the business from a long-term basis. It is not short term. From time to time, there are times when our shares are not up as much as we like for a quarter or a period. But that is a short-term look.

As you pointed out, we do have to look at cross-channel information, and our cross-channel information is different than what you quoted there. But I think to give some specifics maybe Vince can enlighten you a little bit.

This is Vince. A couple points. Clearly if you just look at IRI or Nielsen numbers, we understand the concern, primarily as you look in grocery. Let me just take a step back, and I want to reemphasize a couple of things that Tim mentioned.

First, our stated objective is 1 share point strategically. We know and recognize we are going to have periods when we are better than that, and some periods when we are not.

Secondly, I can say to reinforce that what you see is not the total picture, and on a shipment basis both our food spreads and peanut butter businesses for the quarter and year-to-date are averaging between 4 and 5.5 percent. So on a shipment basis, and that is not loading warehouses, that is clearly going through other channels that you're not seeing.

I want to pick up on your point, John, about we're coming off a period a year ago where it's a tough period. To hold our own, we feel very good. For example, last year we grew our fruit spreads business 7 percent or 2.5 share points; and our peanut butter business 15 percent or 3 share points. So the fact that we were down slightly during -- and I'm focusing on 12 weeks, which is more of our focus during the --

That's what I was using.

Yes, during the back-to-school. So again, it was coming off a very tough period in terms of looking at it on that perspective.

The other thing I would say, if you look at long term, and actually medium term, since we have owned the Jif business we have increased that volume by about 35 percent. That has far exceeded our long-term expectations.

Finally, I would just say we are very excited about what we have in the back half of the year, particularly in food spreads; we've just introduced -- and just hitting the shelf -- our inverted squeeze new food spread bottle.

Good; well, thanks. Just a second question if I could. You indicated that marketing expenses in the quarter were up 39 percent. But sales were up 57 percent. So basically your marketing expenses as a percentage of sales declined.

It does look like -- I guess the game plan this year was to take all the cost savings from Multifoods, spend them back in higher marketing, don't take any cost savings down to the bottom line. How do we know you are not doing that?

This is Mark Belgya. In terms of looking at the marking spend as a percent of sales to sales growth, 1 thing I would point out is that while the majority -- well, all the business in the U.S. is a retail business.

But if you look at our Canadian business, there is a significant portion that is both industrial and foodservice, which does not require the marketing support that a retail business would. So we would expect that kind of ratio when you look at sales growth to marketing expense spend.

Okay, thanks.

Christina McGlone with Deutsche Bank.

Last quarter you had mentioned that the base to grow the 8 percent was 236. I am curious, did that base change now that the Brazilian operation was sold?

This is Mark again. Recognizing that, as we act on our strategy, that that base does tend to move, as you have noted we have restated prior years for just the first 2 quarters, but did not provide a full-year restatement to back out Brazil as a discontinued operation.

Our best estimate right now is that Brazil last year actually operated in a loss position. So it will probably have about a 2-cent impact. That will be available likely with our second-quarter filing. But we remain committed, as we have said, to our 8 percent growth for the year.

So 2 cents for the year? That is for the entire year, you said?

That is correct, yes; approximately 2 cents.

Another question I had was the Uncrustables expenses; is that 10 million in additional for the rest of the year? Is that correct?

Yes, that is correct.

I thought before it was going to end at the end of the third quarter, and now has it been pushed into the fourth quarter as well? Are we looking at like 10 million of additional expenses in the third quarter?

The 10 million is over the next 6 months. Again we obviously did not want to have that occur, but we think for the next 6 months it will be 10 million.

That is longer than we thought last time. We thought we would be completely ramped up by the end of the third quarter, but we have now pushed that back to the end of the fourth quarter.

Okay. Could you elaborate on what in particular is the delay? Because you sounded kind of positive about this (technical difficulty). So what would be the reason for the delay?

I think a couple things. First off, it is a very complicated facility; and while we gave ourselves 3 months for a ramp up, it's obviously taking longer than that. It is just a complicated facility. We have incremental labor, materials; and we have under-absorbed overhead that are really driving the costs.

Okay. Another question. I guess last quarter you had also said that Crisco, the pricing, the list and retail pricing was below the competition. So it seemed like you were poised for growth potentially this quarter.

Just curious; maybe Steve you can talk about what is going on in that category. It looks like from the IRI data that private-label is coming on really strong now. Can you talk about that?

Sure. A couple of things. We, as we said last quarter and again this quarter, we looked at this year as a total year. When we look at our marketing trade and consumer activities, we focus those more on the holidays of Thanksgiving and Christmas and on the Easter quarter.

So the results you see to date are up against some pretty tough numbers, similar to what Vince said. We grew Crisco substantially a year ago, so given our progress to date against those numbers, we think it is doing okay.

We feel very good about Thanksgiving, and our bookings for November are very strong. Our programs are very strong. But those programs dropped in November this year; they dropped in October a year-ago. So those sales will fall more in the third quarter than in the previous year.

Last question. Did the hurricanes have any effect on your peanut costs?

No, they didn't. They had no impact on the peanut crop.

Okay, thank you.

George Askew with Legg Mason.

Christine got a lot of my questions here, but sparked a few others. Can you comment on the market declines in the price for soybean oil, and what that is doing to Crisco with regard both to pricing and the margins?

Sure. Hi, Steve Oakland again. We have announced a 6 percent price decline effective the middle of January. But as traditional in this market, during high promoted periods of soybean prices or below list prices, there tends to be an equivalent amount of trade spend.

So there is a lot of trade spend to equalize those prices going on through Thanksgiving and Christmas. Then we will take a list price decline in January.

Okay, super. You have still got your crack team of soybean oil hedging guys there?

Yes. The same team that came with us from Procter & Gamble; and we feel very good about the coverage we have on and that it protects us from volatility both up-and-down, as we go into next year's crop and get through this year's crop.

Okay, very good. For International Multifoods, looking at their results in the last couple of years, their November quarter was always the big quarter. As I recall, about a third of sales, half of operating income.

Clearly this quarter reflects probably 2 months -- there is a 2-month overlap between your October quarter obviously and their November quarter. Can you comment a little bit about the seasonality of Multifoods? Is November a huge month for them? Or have we already seen the big benefit here in September and October?

November is traditionally their biggest month, and a lot of their brands are very important to the retailer when it comes to Thanksgiving promotions and Thanksgiving merchandising. December is a big month, as well, with Christmas.

So I would like to really commend the Multifoods team. On the heels of what they experienced last year they did hand over a great merchandising plan. So those plans were in place. We have been able to effect them a little bit and improve them we think, but we are encouraged by both Thanksgiving and Christmas.

We're also -- we are halfway or 3/4 of the way through the month of November. We have started off very strong. We're very confident.

Okay, excellent. Lastly, Richard and Tim, on Scottsville, my math suggests that you are spending probably 18 cents a share there; $16 million this year. Which I don't think -- I did not anticipate last April, May, and I assume you guys didn't either. Where it is that money coming from? Is anything getting shortchanged this year as a result of the cost requirements at Scottsville?

Secondly, you suggest that the returns there, you are confident will get to the levels that you expected. You talk about throughput improvements. But is it going to result in just a sustainably higher cost structure at Scottsville that you are going to have to make up for with price?

Is it just no way to get the productivity there that you expected? Or do you think you will get there with this incremental spending?

Let me address part of that. First of all, I think your numbers are pretty accurate and very close. Look at a couple of things. We are absorbing that, and we have looked at other people to help in their budgets. But overall, our business is just strong; and we are able to absorb that additional cost of Uncrustables because we're actually having a very good year.

Going back to John's original question, if you actually look at our base business, and talking about primarily Smucker brand, and the Jif brand, and Knudsen brand, and exclude the oils, we are up about 6.5 percent in the quarter. So that is a strong quarter. So we are being able to absorb the additional cost of the Uncrustable plant.

Going back to the Uncrustable plant, that is, as Paul mentioned, it's a big plant. It's a complicated plant. I think we just underestimated the cost of ramping that up. We do anticipate that we are going to get to the original cost structure. It is just taking us longer than we thought it was going to do.

We have made a lot of progress in the last 6 months. As we said, we have made a 30 percent increase in where we were just 3 months ago, in terms of the run rates. We have to do that again in the last 6 months, and we feel confident we can do that. We have got a great team working on it.

So long-term, we definitely feel confident that we will get to where we need to be. The most important thing is that product is doing extremely well in the marketplace. That is the most important thing, because it has to be accepted by the consumer; and it has been. We long-term will get the costs to where they need to be.

Let me just add to what Richard said, just in terms of our enthusiasm about the product. We were aggressive in terms of what we were trying to accomplish. The reason we were is because the easier thing is to manufacture the product, the tough thing is to be sure that it's the right product for the consumer.

I think as you all know, to be first and to take advantage of being in the market first is really what we are about. Sure, we would like to have had everything work exactly the way we wanted to at the operations standpoint. But we're not discouraged about that, and we are still enthusiastic about the product going forward.

Excellent. I think on the last call you suggested that we may see some new product news out of the Uncrustables platform summer of '05. Is that still reasonable?

(inaudible) We have delayed that because we are taking -- we're doing the right things first in getting the plant up and running. So we have got some great new products, but we are pushing back the introductory date of those.

So now it sounds like it won't make it before Labor Day.

That's true.

Fair enough. Thank you, guys.

Leonard Teitelbaum, Merrill Lynch.

Actually a couple of questions. Let me pick up kind of where I was going based on George's questions here really. At what point does the bleeding stop in Scottsville? Are we talking about -- we have another 2 quarters, you have said another 6 months? But at some point we have to start breaking even at the worst on the plant, given the volumes that you have been alluding to here.

I'm just wondering, when does that start to show up on the earnings? If not earnings, growth and lack of loss? Are we talking another year and a half? Are we talking another 4 quarters? When do you expect at least to break even?

There's 2 answers to that question. 1 answer is when will we break even on Uncrustables as a line? That really depends upon 2 things. It depends upon ramping up that plant to where we need to get it. It also depends upon how many new products we introduce. Because every time we introduce a new product we are going to spend behind that new product.

If you look at the Uncrustables business, we will probably -- it may be, depending on when we introduce those new products, it may be a year or 2 before we get to a breakeven on that line.

But, we will obviously be in a much better cost position next year. Just because as George mentioned, we definitely are making great progress; and that additional multimillion in costs that we incur in this year we won't be incurring next year. So that will flow, hopefully, part of that will flow to the bottom line.

Obviously, the point we are trying to get to is we kind of -- you have given us at least right now a fix on '05. I'm just wondering whether '06 can see a meaningful reduction in the loss as we begin to go forward or not.

Definitely. Significant reduction in that (multiple speakers).

Now, if we were to break down the growth issue, you have given us some numbers, but if you could help me out a little here. If we were just to take the Multifoods line as though it were a separate line, to the extent that you can do it, could you tell us how much that contributed to operating income, and if you could to pretax?

This is Mark. We really cannot do that. Ever since we have acquired the business it's been our plan to fully integrate both in Canada and the U.S. It really just is not possible to do what you're asking.

I guess what I am trying to say is -- and I think you have touched on it when you talked about the promotional timing differences. Because clearly, as I understood you to say, the promotion has been pushed out until next quarter, closer to consumption. Last year it came in at an earlier point in time.

To keep me from running too far in 1 direction, are we going to see a more muted response than one might have thought next quarter as the promotions start to make its presence felt on the profit margins? Are we looking for a pickup to show a nice lift in that area?

Are you speaking, Leonard, primarily (multiple speakers) ?

I am talking about the entire Company. Look, we know that you have said that you are going to shift your promotions. Last year they fell in the October period; and this year they are going to fall in next quarter. Matching it up, I presumed closer to consumption.

What I don't want to do is I don't want to -- I am trying to get a handle on how much income we are going to get vis-a-vis the promotional dollars in this coming quarter. That's all.

This is Steve Oakland. That promotional swing is primarily in the Crisco business; in fact almost exclusively in the Crisco business. I think we will see stronger Crisco volumes certainly in the Christmas and Thanksgiving period. And we have got a pretty soft comparison for Easter.

So we would expect our year in Crisco to be much more solid in the back half than it was in the first half.

So you are saying the Pillsbury baking items etc. will not really be that big a factor in terms of promotion?

They have actually done -- the Pillsbury line has actually done very well in both the second quarter, and we anticipate it's going to continue to do that in the third quarter. But we really didn't shift their promotions.

No, I don't think we shifted it. I would say that the execution this year, based on what happened to them last year, they did have their execution lined up for Thanksgiving and Christmas this year, and it looks great.

So compared to last year I would expect it to do better, but more historical. The volume should fall more how it did historically.

Thank you very much.

Scott Van Winkle, Adams Harkness.

I hate to keep harping on Uncrustables, but you made the comment in your prepared comments about the easing of allocations in the schools. Can you just clarify? I assume that is supply driven not demand driven.

This is Paul Wagstaff. Scott, you're correct, that is supply driven. We are very comfortable that we are seeing an easing in the supply of the school market, and we will continue to see that for the rest of the fiscal year, and be in position to fill all of our customer needs by FY '06.

If you could break out the startup cost at Uncrustables, what percentage of your loss on Uncrustables is being made up by these startup costs?

There's 2 parts. There's parts of the introduction of the line and the intro cost. The other part is the startup cost. Mark, it's --

Let me say it's predominantly the startup costs that are affecting it. 3/4 probably?

It would not have broken even this year, but it would have been much closer to breakeven than it is this year. But you're right; probably 3/4.

Got you. I don't think I understood the reasoning behind the lower interest expense. Can you just explain it 1 more time? I apologize.

It is a little confusing; be glad to. When we acquired the Multifoods we also assumed some debt from the company. It is simply a matter of GAAP requiring us to value that debt at fair market. To make it simple basically our value assigned to that was greater than the $200 million of face.

So what we're doing is we are amortizing the difference between the face value and its fair value over the life of the debt. So it is treated as a reduction in interest expense on a period basis.

Great. You might've said this and I missed it. Your expectations for cost savings from the IMC acquisition; are those still intact?

Yes, they are.

Great. Thank you.

Ann Gurkin, Davenport & Company.

Starting with Pillsbury, I wonder if you could comment on percentage of the growth from holiday products; and where do you see that percentage going long term?

I can comment on that. They have a nice seasonal line of cake mixes and frostings and Funfetti products. They are nice; they are incremental; but they are not material I would say.

The growth has come from core business and is coming from whipped frosting. We launched whipped frosting nationally, and that is the 1 key segment we were not in, in the frosting business. We have Ultimate Dessert kits, a complete dessert kit in a box, that has been in limited launch. That product frankly has succeeded our expectations.

Can you just review your long-term growth plans for the Smucker's fruit spreads, Jif, and Crisco? It just seems to me that these core brands are running behind what I would think would be your long-term trends. Can you just go through some of that?

Sure. Our stated objective is to grow our core businesses by 4 percent; 3 percent through share of market and 1 percent through new products. We are on that and have exceeded that. So I would say we are meeting or exceeding our expectations.

Can you break it out by brand?

And 1 share point per year. I'm sorry?

Can you break it out by brand? Jif, Smucker's, Crisco?

Again, each of those brands have similar objectives. So on the Smucker's and Jif that would be -- that same guidelines would hold.

The Crisco business for the first 6 months is behind that pace obviously. That is a pace that we want to achieve over time. We do have a number of new products. The trans-fat-free Crisco shortening.

Our shortening business is above last year for the first 6 months. That is the first time we have been able to say that in a long time. So good quarters for shortening.

The oil business has been very competitive, and the plans we have are to balance our spending on that throughout the whole year, so provide it more balanced growth. And then we also have that (inaudible) -- I don't know if you've seen the new package, but we have a measuring cup spout, and we are very excited about that.

Your capital spending plans for this year and next?

Capital spending this year as we stated is between 80 and 85 million, which is still higher than it has been. We would expect that to come down somewhat next year, particularly with the fact that the Scottsville plant made up a portion of this year's.

Great, thanks very much.

John McMillin, Prudential Securities.

What was the adjustment to interest expense because of this non-cash assumed debt change, Mark?

John, it's about $1 million a quarter, and that would continue.

Okay. Just in terms of targeted cost saves, if I remember correctly, the benefits, the cost savings were projected for 40 to 60 million over 3 years, with 12 to 18 million I guess in the first full year. You only have it 10 months. Could you quantify what you expect the cost savings to be from the acquisition in this year and what was realized in the first quarter?

We're basically right on track on those numbers. Your numbers are right. You want to talk about the first quarter?

I would like to talk about it. (multiple speakers) Would you like to talk about it?

I would say that we are tracking on this pretty ratably. Certainly in the second half of this fiscal year we would expect to pick up a little bit more, because as I mentioned we will be closing the headquarters in Minneapolis. As the year progresses we will see less and less cost coming out of that location.

So for the portion of the overall first-year synergies that was G&A, we will pick up a little bit more of that in the back half of the year.

Thanks a lot.

At this time, gentlemen, I will now turn the conference call back to you for conclusions.

Thank you very much for your interest. As this being the Thanksgiving season, we wish you all a wonderful Thanksgiving and really encourage you during this season to do a lot of baking. Take advantage of that drain-back product from Crisco. But have a great day. Thanks.

Ladies and gentlemen, if you wish to access the rebroadcast after this live call you may do so by dialing 1-888-203-1112 or 719-457-0820 with a pass code of 808255. (OPERATOR INSTRUCTIONS) This concludes our conference call for today. Thank you for participating and have a nice day. All parties may now disconnect.